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Should we tax or let firms trade emissons? An experimental analysis with policy implications for developing countries

Author

Listed:
  • Coria, Jessica

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Villegas-Palacio, Clara

    (Facultad de Minas, Universidad Nacional de Colombia - Sede Medellin)

  • Cárdenas, Juan Camilo

    (Dept of Economics, Universidad de los Andes, Colombia)

Abstract
In this paper we use laboratory experiments to test the theoretical predictions derived by Villegas-Palacio and Coria (2010) about the effects of the interaction between technology adoption and incomplete enforcement. They show that under Tradable Emissions Permits (TEPs), and in contrast to taxes, the fall in permit price produced by adoption of environmentally friendly technologies reduces the benefits of violating the environmental regulation at the margin and leads firms to improve their compliance behavior. Moreover, when TEPs are used, the regulator can speed up the diffusion of new technologies since the benefits from adopting the new technology increase with the enforcement stringency. Our experimental results confirm these theoretical predictions. While the aggregate emissions do not statistically differ between the two policy instruments, the fraction of firms violating the regulation and the aggregate extent of violation are lower under TEPs than under emission taxes regardless of the monitoring probability. Hence, in contrast to previous studies, our results indicate that TEPs would appear to be a feasible policy alternative in weak regulatory contexts.

Suggested Citation

  • Coria, Jessica & Villegas-Palacio, Clara & Cárdenas, Juan Camilo, 2011. "Should we tax or let firms trade emissons? An experimental analysis with policy implications for developing countries," Working Papers in Economics 516, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0516
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    File URL: http://hdl.handle.net/2077/28008
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    References listed on IDEAS

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    1. Macho-Stadler, Ines & Perez-Castrillo, David, 2006. "Optimal enforcement policy and firms' emissions and compliance with environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 51(1), pages 110-131, January.
    2. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
    3. Lata Gangadharan & Rachel Croson & Alex Farrell, 2013. "Investment decisions and emissions reductions: results from experiments in emissions trading," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 8, pages 233-264, Edward Elgar Publishing.
    4. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2011. "An experimental analysis of compliance in dynamic emissions markets," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 414-429.
    5. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    6. Coria, Jessica, 2009. "Taxes, permits, and the diffusion of a new technology," Resource and Energy Economics, Elsevier, vol. 31(4), pages 249-271, November.
    7. Coria, Jessica & Sterner, Thomas, 2008. "Tradable Permits in Developing Countries: Evidence from Air Pollution in Santiago, Chile," RFF Working Paper Series dp-08-34-efd, Resources for the Future.
    8. Cason, Timothy N. & Gangadharan, Lata, 2006. "Emissions variability in tradable permit markets with imperfect enforcement and banking," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 199-216, October.
    9. Stranlund, John K & Chavez, Carlos A, 2000. "Effective Enforcement of a Transferable Emissions Permit System with a Self-Reporting Requirement," Journal of Regulatory Economics, Springer, vol. 18(2), pages 113-131, September.
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    14. Malik, Arun S, 1992. "Enforcement Costs and the Choice of Policy Instruments for Controlling Pollution," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 714-721, October.
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    Cited by:

    1. Pengsheng Li & Yanying Chen, 2019. "The Influence of Enterprises’ Bargaining Power on the Green Total Factor Productivity Effect of Environmental Regulation—Evidence from China," Sustainability, MDPI, vol. 11(18), pages 1-20, September.

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    More about this item

    Keywords

    laboratory experiments; emission taxes; auctioned tradable emissions permits; imperfect monitoring; technology adoption; developing countries;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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